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District Court Dismisses Securities Act Claims As Untimely And For Failure To State A Claim, Addressing Inquiry Notice And Materiality As A Matter Of Law
11/14/2016On November 7, 2016, Judge Lewis Kaplan of the United States District Court for the Southern District of New York dismissed a putative securities class action against a helicopter operating company, CHC Group Ltd. (“CHC”), and individual and underwriter defendants who participated in CHC’s initial public offering. Rudman v. CHC Grp. Ltd., — F. Supp. 3d —, 2016 WL 6583788 (S.D.N.Y. 2016). Plaintiffs had sued under Sections 11 and 12(a)(2) of the Securities Act of 1933 (the “Securities Act”), alleging that CHC’s IPO registration statement omitted material facts because it had not disclosed that one of CHC’s largest customers, Petroleo Brasileiro S.A. (“Petrobras”), had refused to pay fees over a period of time during which certain helicopters were grounded for industry-wide issues. When that particular disclosure was eventually made, CHC’s stock price dropped $0.99 per share. Nevertheless, concluding that the registration statement disclosed sufficient information to effectively put investors on notice of the Petrobras issues, and that any omitted information regarding the dispute was immaterial or puffery as a matter of law, the Court held that plaintiffs’ claims were untimely under any interpretation of the requirements of inquiry notice, and, separately, that the complaint failed to state a claim that there was any actionable omission under the Securities Act, including pursuant to any duties under Items 101, 303, and 503 of SEC Regulation S-K, Item 11A of SEC Form S-1, and SEC Regulation C. The Court thus dismissed all claims with prejudice except as to CHC, the claims against which were subject to an automatic stay under Chapter 11 of the Bankruptcy Code.
The Court’s ruling that plaintiffs’ April 2015 claims were untimely under the Securities Act’s one-year statute of limitations was based on its conclusion that a reasonably diligent investor would have discovered the alleged omission, and could have asserted claims, by March 2014. In particular, although plaintiffs alleged that CHC had failed to disclose the specific fee issue with Petrobras, the Court held that such information could have been gleaned from public filings, including because CHC disclosed the negative effect on expected revenue from the suspension of the relevant helicopters, and a $21.3 million decline in revenue from activity in Brazil, primarily as a result of the helicopter suspension. Thus, although CHC did not expressly disclose that its losses arose from Petrobras’s refusal to make contractual payments, various disclosures could have been pieced together by an investor to understand that was the case.
Separately, the Court granted defendants’ motion to dismiss on the independent basis that plaintiffs failed to identify any materially misleading statements or omissions in CHC’s IPO registration statement, even though the stock price dropped when CHC expressly disclosed the Petrobras fees issue and even though CHC’s competitors who suffered similar payment declinations had made more detailed disclosures. The Court concluded that, in light of the total mix of information available to investors, the omission of detail regarding the Petrobras fees “did not render any . . . statements remotely misleading.” The Court emphasized that companies “must choose to what granular level they will disclose an unusual event.” The Court also found that additional disclosures had not been required by SEC regulations, including Item 303 of Regulation S-K.
The decision will be helpful to defendants in establishing that, even where there is a stock drop based on the disclosure of a new fact, if sufficient related information was previously disclosed then an alleged omission might have been sufficiently discoverable beforehand so as to trigger the statute of limitations, or the alleged omission may be immaterial as a matter of law.
